Feb

18

He hovered nightly like a dove around its pillaged nest.

 Bird nests provide an environment of shelter and protection for eggs to develop. The exquisite variety of the construction techniques, building materials, and camouflage used in these nests, and also their importance to the ecology of birds is described here. Numerous articles cite the importance of nest building in birds as an essential aspect of their evolution, and such articles include Dawkins The Extended Phenotype For Behaviors. With something as important as this, one would expect that markets would have borrowed from nature and that there would be numerous areas where the mistress and the invisible hand would have developed comparable features in market behavior for the development of the young. Yet a search shows that the main references to bird nests in markets are to the habits of very successful Asian traders in eating gourmet delicacies such as birds' nests rather than using them for profit in their strategies. As a start, this must be remedied by me and the colleagues here.

Undoubtedly, the main application of nests to markets is the protective function that companies in one index play with respect to their graduation to the next stage of life. The mid market S&P 500 is always the best bet for young companies to develop into the big 500. The Nasdaq is a nest for the NYSE, and the S&P small cap is a nest for the midcap. The IPO's are a stage in the life for future NAS 100. What strategies do such companies play? Do the parents of the index themselves play to separate the survivors from those who decay? Are there comparable forms of altruism that some companies play as they do in birds' nests where the young devote their life to feeding their kin knowing that it will lead to a much greater overall transmission of the essence of their being?

Another area where nests are found is at levels of price that bring one into a new class. One level would be the movement from below five where stocks are usually not eligible for margin to above five where companies are eligible for inclusion in most portfolios. The same would happen for a company that starts paying dividends for the first time since certain funds and institutions are restricted to dividend payers only. At a more general level, big orders often rest to provide nourishment for a company. It could be from a buy back program or perhaps an insider who is accumulating Insiders often accumulate stock in their companies. This is sometimes a signal that a change in state, like an acquisition, is in the offing or perhaps a buyout in a going private transaction.

Option strike levels provide barriers and nesting sites for traders to nourish themselves until the price is ready to come out of the nest into an area where real buying, selling, exercises and conversion of the stock are possible. Considering the strategies of nest building, in particular the effort that is put into its construction with reference to the probability of survival for the egg to maturity, one should consider the many fledgling companies that are incubated in research laboratories, entrepreneurial efforts within companies, and previous acquisitions that are being nourished for a proper time in the market.

May I suggest that we expand the subject to the many fruitful areas that could be considered and fomented by a general study of bird behavior. Such questions as the following would only be a beginning. How do the feathers of birds enable them to fly? What are the special functions of display behavior in birds that are so successful in the sexual selection of their partners, in particular, the back and forth strutting that stocks often do to attract the interest of the public and the dealers? What are the migration patterns and timing of stocks that follow in the footsteps of our feathered friends? Most important of all, what are the functions of birds, the stocks and companies that fly about in the general structure, growth, and stability of markets? What songs do markets sing to attract, warn, and establish territory?

From Alan Milhone:

"Birds of a feather flock together." Is this the same with investors and brokers in that they all want to stay with the winners (performers)? I liked the way you described the construction of a bird's nest, guess that is where the term 'nest egg' developed? Or 'putting all your eggs into one basket' meaning one should stay diversified? The strong and secure nest is analogous to a strong and protected portfolio.

I enjoyed the Chair's article and it gave me a different perspective on nesting & ways of attracting investing. Not sure about songs used for attraction. My guess is how online or televised marketers vie to attract a potential investor's attention in hopes of getting them to buy into their program, much like a male bird hoping to attract a female's attention. The male bird's 'chirping' is music to the females' ears (hopefully) and the online/televised promoter of various stocks and investment programs is hoping to lure our attention in similar ways.

Jim Sogi writes:


Another bird nesting behavior in the market is the bunching of the price range within a certain area. For example over the last few days we see the bunching nesting behavior in the 1256 area, and before a nest was built in the lower branches at lower levels. When the little birds are strong enough, they venture out and start to fly from the nest, taking forays flying to higher levels.

There is busy back and forth activity as the nest is build. The nest normally must have a structure and normal time to build before the birds either venture out or, for some reason, the whole nest falls out of the tree an on to the floor, as in rare occasions it does, killing all the little chicks. Bigger birds like eagles that build bigger nests at higher altitudes soar higher. Perhaps that is why Dow big birds are hitting all time highs and SPs are still moving up to their all time highs, in sight a couple bird nest levels away.

J. T. Holley writes:

On a similar note [to previous post] you can look down the option chains intra-day and see birds perched either on nests or on wires and see them "spooked" as higher and higher numbers are reached historically. It's almost like opening up a dark room and seeing the cockroaches scatter when the light of day hits them.


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